Walking a tightrope

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I am pleased to share with readers the Executive Summary of the latest quarterly report Christine Tang and I wrote for GlobalSource Partners, a New York-based network of independent analysts, mostly former finance and central bank officials (globalsourcepartners.com).

“When we flagged a looming recession back in April and projected a deep 7% GDP contraction in May, the most pessimistic at the time, we had expected that after one of the most stringent lockdowns in the world, the economy would slowly transition by year-end into a “new normal.” Although the government, using blunt rules to regulate activity, is trying to walk the tightrope of keeping infections down and economic activity up, the 3Q restart has been restrained by rising infections and continuing critical constraints in public transport, with fiscal conservatism and weak public health institutions and leadership unable to lift confidence. We think that not only is a larger 8.5% GDP contraction in 2020 more likely now, but also that the government’s projected V-shaped recovery in 2021 is unachievable. Reviving animal spirits will be very difficult considering, a.) the simultaneous shock to demand and supply that has led to massive unemployment, b.) the new ways of thinking and doing things in response to the pandemic that have been disruptive to businesses, and, c.) the increased regulatory and political uncertainty as the administration tries to come to grips with the crisis and its fallout on people’s lives.”

The rest of the report discussed: a.) monetary authorities’ success in instilling confidence in the financial system, although as far as encouraging more lending, they seem to be pushing on a string; b.) fiscal authorities’ constrained policy space due to the sharp fall in tax revenues; and c.) the hefty increase in external account balances resulting from the pandemic. Our forecast summary is in Table 1.

forecast - Walking a tightrope
And excerpts from the political section:

“Some analysts, trying to put the pieces together, surmise that: a.) the President is not well — not incapacitated but certainly weaker than he says; b.) his best laid plans for a successful 2022 exit have gone awry due to COVID-19 which he seems to think is a scourge that is out of his hands; and, c.) his staunchest supporters, unwilling to risk a constitutionally mandated succession in the event something happens to the President, staged the Rev Gov (revolutionary government) movement as a trial balloon to test the response of state security officials whose support is critical for the movement to succeed. Others simply dismiss all the talk as noise and especially in the case of Rev Gov, merely a ploy to distract public attention from government’s missteps in handling the pandemic.

“Yesterday, the President emerged from his quarantine looking in the pink of health. That should momentarily dispel talks of his poor physical condition. The same cannot be said of the country which yesterday saw COVID-19 cases exceed 220,000 from over 93,000 a month ago. Although there has been some lengthening of the case doubling time after two weeks of tighter quarantine restrictions in August, moving in and out of strict shelter-at-home policies is a high-cost, unsustainable approach to managing the pandemic.

“In its fight against COVID-19, the Philippines is handicapped by weak public health institutions and what appears to be a leadership vacuum. In the same way that the President has been able to delegate management of the economy to his able economic managers headed by the finance secretary, perhaps the President ought now to find an equally competent alter ego to manage the health crisis.”

covid19 ASEAN - Walking a tightrope
MANDATED DEBT MORATORIUM,
A SLIPPERY SLOPE
Bayanihan I and it’s IRR directed all lenders to grant a 30-day grace period or extension for the payment of all loans, including credit card payments and pawnshop loans, falling due within the enhanced community quarantine (ECQ, the strictest quarantine level) period, without incurring interest or any additional charges and fees on borrowers.

The House version of the Bayanihan II would extend this by a full year. This prompted Central Bank Governor Ben Diokno to observe that “while we recognize the noble intentions behind the 365 day moratorium on loan payments, the said policy may result in unintended consequences that will severely affect the banking industry, the financial system, and the economy.” He added that this could pose a funding crunch on banks and could put “significant strain” on the liquidity and capital positions of lending institutions, which rely on cash flows to keep lending activities going. He feared this could even trigger a bank run and undermine confidence in the banking system. With limited cash, banks may also be forced to become more stingy in granting credit to new and repeat borrowers, including struggling MSMEs which are considered risky clients. Thankfully, after lengthy discussions in the bicameral committee, the final version whittled down the moratorium  to a more manageable 60 days.

My concern is that once these 60 days pass, and considering a possible slower recovery, there will be much pressure for a further extension. For all the good reasons cited by the Governor, this would be the wrong thing to do, and will end up hurting not just the borrowers themselves, but also depositors, the entire financial system and the economy. The most vulnerable poorest end up being the most severely impacted in such an event.

 

Romeo L. Bernardo was finance undersecretary during the Cory Aquino and Fidel Ramos administrations.

romeo.lopez.bernardo@gmail.com

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